A Guide to Third-Party Logistics
From warehousing, inventory management, and order fulfillment centers, third-party logistics (3PL) processes are at the heart of the supply chain. For brands or sellers that rely on these logistics businesses, the receiving, storing, and shipping of inventory are crucial components to their growth—especially when supply chain management can be complicated.
With the specialization of logistics functions becoming a necessity for many organizations, especially with the rise of ecommerce and omnichannel fulfillment networks, the outsourcing of these specific responsibilities has fallen to third-party warehouse businesses called 3PLs, or third-party logistics warehouses.
But what exactly is a 3PL? What do they do? And what are the reasons for hiring one?
What is a 3PL Warehouse?
A Third-Party Logistics Warehouse, or 3PL, is an outsourced logistics partner for warehousing, inventory management, and order fulfillment. They store and ship inventory for multiple businesses, providing seamless integration of supply chain operations. The rise of online retail has driven 3PL growth, with specializations in areas like B2B, ecommerce, retail, and more. 3PLs allow brands and sellers to focus on their core needs by managing warehousing operations and transportation services. Essentially, 3PLs are the linchpin of the supply chain, enhancing efficiency and enabling automation of order fulfillment.
What a 3PL is Not
Private warehouses, or warehouses that only fulfill orders of their own products, are not considered 3PLs. These types of warehouses are usually owned and managed by manufacturers or retail stores. They use specific accounting, billing, and shipping software that often does not allow for the flexibility needed to manage inventory and billing for multiple customers.
What Are the Responsibilities of a 3PL?
Third-party logistics warehouses take on important supply chain operations to help their customers focus on growing their own businesses. This means everything along the supply chain and includes logistics operations like:
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Scheduling and executing the receiving of inventory to the warehouse
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Sorting, managing, and accounting for all inventory
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Maintaining inventory in proper conditions
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Negotiating discounted shipping rates
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Picking, packing, and shipping products
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Kitting and assembling products if necessary
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Managing recurring subscription boxes
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Value-added services (e.g., optimizing the unboxing experience)
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Returns or reverse logistics
Who Benefits from 3PL Services?
3PL services function as outsourced businesses that meet a company’s coordination and supply chain needs. Retailers, brands, and merchants are regularly turning to 3PLs to outsource their supply chain needs such as distribution and warehousing. Nowadays, many kinds of businesses are regularly partnering with 3PLs. They range from small ecommerce retailers all the way to Fortune 500 businesses. Each one sells a wide range of products. 3PLs provide necessary services that help a business grow.
Small Ecommerce Businesses: A small ecommerce business might be able to manage and self-fulfill their orders initially. However, once a business starts to grow and orders increase, they will start to spend an excessive amount of time packing orders and shipping in-house. So much extra work prevents a company from scaling.
Although a small business can hire warehouse workers to keep up with demand, they will eventually run out of room and be faced with renting a warehouse to increase their space which becomes a costly endeavor. Additionally, they may want external expertise to help drive efficiency and automation in their ecommerce fulfillment processes.
As a result, small businesses get locked in a catch-22, they need to expand to grow their business, but the costs and space become extreme and gouge out their bottom dollar. They can face overspending on storage and shipping costs and employee salaries needed to fulfill orders and manage inventory. The answer to the dilemma is to outsource fulfillment to a 3PL so the business can start to focus on other necessities and save money. A 3PL will tackle order fulfillment and provide necessary services while reducing shipping rates, driving operational efficiency, and keeping up with best practice workflows.
Medium-Sized Companies: Medium-sized companies can also benefit from a 3PL. A fast-growing company needs a 3PL for strategic fulfillment operations to meet its level of growth. If a company has outgrown its current warehouse location, then reaching out to a supportive 3PL can help meet the demand and scale up once the order volume increases. In some situations, they may strategically split inventory throughout several distributed fulfillment centers to ensure that items reach customers faster and at more affordable rates to help increase a company’s profitability. Leveraging a 3PL can also help these companies handle seasonal peaks without sacrificing the consumer experience.
Large Fortune 500 Companies: Reports carried out in 2017 and 2020 by Armstrong and Associates found that 90% of all Fortune 500 companies use a 3PL. Of course, one must remember that there are many types and sizes of 3PL companies. A 3PL that works with small Shopify websites is not going to be the same as a 3PL that works with a Fortune 500 company. Each 3PL is designed to meet the needs of their customers such as tracking inventory across multiple channels and more.
What Types of Companies Use 3PLs in 2023
Whether a company is offering a solitary product or features a full catalog, hand-made items, or subscription orders, the fastest growing and most successful companies partner with 3PLs.
Many companies use 3PLs such as those selling the following:
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Nutraceuticals
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Wine and spirits
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Bulk goods
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Raw materials
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Electronics
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Pet accessories
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Apparel
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Cosmetics
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General merchandise
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Cold Storage
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And more!
Eight 3PL Services To Use for Your Growing Ecommerce Brand
Services differ between 3PLs. Some might specialize in one niche, and others in other functions. Read on to explore several 3PL warehouse services below:
1. Transportation: Many 3PLs focus on the cornerstone of transportation services, which they utilize to move shipments between manufacturers and warehouses to companies and buyers. Freight forwarders transport large shipments via various countries, and smaller shippers such as USPS, UPS, DHL, and FedEx are often used to move smaller parcels.
2. Warehousing, Fulfillment, and Distribution: Many 3PL warehouses focus on services like warehousing, fulfillment, and inventory management coupled with shipping and returns. Sellers turn to this type of 3PL to outsource all of their fulfillment and warehousing needs. The 3PLs that manage these, can also manage distribution services, including transportation, shipper identification, shipping rates, and optimized shipping strategies.
3. Financial 3PLs: Large ecommerce companies often use financial 3PLs that offer accounting and cost control services to help control the cost of freight forwarding, tracking of inventory, and management. Typically, 3PLs that offer these services meet the needs of larger companies.
4. Receiving: A 3PL must receive inventory to fulfill orders and ship. At a 3PL warehouse, they will store a company's inventory of products before they ship to a consumer. The 3PL coordinates the inbound shipments with the company which may or may not use freight forwarders to manage and organize bulk shipments that flow from the manufacturer to the distribution center. The entire process is part of a 3PL warehouse management process. The best 3PL companies have management software integrated which serves to make the process easier. The software identifies the location of the product and is then put in storage to make it easier to fulfill the order.
5. Picking: Once a customer places an order the next process is known as picking. An order management system will then process the order submitted and send it to the appropriate 3PL warehouse or fulfillment center. Once the order is received, then it is ‘picked’ out of the warehouse or storage bin for shipment to the buyer. Be sure to review the 3PL’s technology to ensure they use bar code scanning to ensure pick accuracy.
6. Packing: After picking, it's time to organize and pack the order for shipment. A 3PL company will determine the best way to pack the product so it is secure, branded, and safe. The entire process is done in a cost-effective way. When it comes to packaging, a 3PL facility must have the technology at its disposal.
7. Shipping: Shipping is a complicated stage of the process and also expensive, but clearly, it is crucial. Everything becomes a web of intricacies with the overwhelming number of shippers, shipping options for each carrier, locations, and cutoff times. A 3PL will build a strategy that focuses on shipping costs, delivery time frames, and ensuring the customer receives their item.
8. Returns: Sometimes a customer orders an item by mistake or it arrives damaged from the shipping process. In either case, the buyer requests a return. Returns are a common part of the shopping process and customer experience. A skilled 3PL company is ready to receive products, document their receipt of the times, and establish firm rules with the seller to know exactly what to do with returns.
How 3PLs Help Sellers
Cost Savings: The number one reason why a seller decides to outsource their fulfillment needs is to save money. The majority of third-party logistics companies collaborate with numerous sellers so they can use their buying power to obtain better prices with logistics vendors on items such as shipping services and materials. The overhead is spread out, so 3PLs offer better rates than if a seller opts to manage things.
Here are several ways that a 3PL helps save money:
Lower Capital Investment Costs: A seller might think it makes sense to operate their own private warehouse and tackle fulfillment orders with their staff, but the process is extremely expensive. As the business grows, so do operational costs, such as labor, rent, security, and packing materials. It’s more cost-efficient to let a 3PL handle things.
Lower Shipping Expenses: The sheer size and reach of a 3PL business model significantly lower the cost of shipping. As a seller handling your own fulfillment, you cannot beat the prices obtained by a 3PL, who spends 100% of their time focused on the logistics industry.
3PLs forms a network of relationships with shipping carriers so they know the best ones to use for various locations, can navigate the sales channels, and know the varying prices depending on the time of year. They ship thousands of products using multiple shippers every day, so they can negotiate bulk discount rates with the largest shipping carriers. Yes, you might save only a small amount per package, but as your business grows, the savings add up and impact your bottom line.
Seasonal Flexibility: Typically, sellers experience spikes in sales throughout multiple times of the year. Sales often increase during the holiday rush or due to special promotions. A 3PL has the ability to scale up and down as needed so your company will not take a hard hit over the additional margin of costs.
Greater Level of Experience: As the owner of a thriving business, you probably have a handle on operations, but fulfillment and logistics might not be your specialty. As your business grows, you’ll want a third-party logistics provider that is a true logistics expert who can provide you with the biggest value.
Better Warehouse Safety: Running a warehouse is not easy. You’ll have to comply with health and safety regulations and standards which include certifications, training, and periodic equipment checks. In addition, the operation of a warehouse takes time and extra staff. Outsourcing to a 3PL specialist helps you maintain workflow and save money.
Greater Customer Satisfaction: Tackling shipping, fulfillment, and logistics might cause you to spread yourself thin which results in errors. Customer satisfaction takes a nosedive which can impact how you grow your customer base. A 3PL eliminates simple mistakes such as incorrect orders, late deliveries, and incorrect labeling. Reducing errors always provides greater customer satisfaction so you can more effectively grow your business, generate more customers, and make existing customers returning customers.
Fewer Equipment Needs: Any business experiences unforeseen costs but with an order fulfillment operation, the expenses can become steep because equipment regularly breaks down or requires maintenance to continue performing.
The equipment needed to operate a warehouse includes forklifts, conveyor belts, barcode scanners, and pallets. The upfront cost of purchasing them is often steep, and so is the ongoing maintenance and repair. A 3PL has all the needed equipment so you don’t have to worry about buying your own. Plus, they repair and maintain all of their mechanical devices which saves you money.
IT Capabilities and Warehouse Management Software (WMS) Software Handled: Many people are surprised to realize that the amount of software a logistics company requires is staggering. Everything from 3PL billing software, shopping cart and EDI integrations, and third-party fulfillment software needs to work with a WMS to track orders and inventory. The software used ensures that everything runs smoothly and efficiently.
However, when you partner with a 3PL, you don’t have to worry about the WMS software to determine what works best. The logistics company will be aware of the 3PL risks customers are most worried about and already have the best WMS for 3PL warehouses in place.
If you partner with a 3PL, you never have to worry about the upfront cost of IT components or training employees to run the software. Everything is included with the 3PL you are working with.
Going Paperless: Another way a 3PL warehouse partner can benefit your business is by reducing manual errors. Automation reduces the amount of manual work that can lead to human mistakes, which can become costly down the line. Working with a 3PL that offers mobile barcode scanning and paperless warehouse management means you can save money on these expensive hiccups.
Less Opportunity Cost, More Capital: If you are spending an excessive amount of time with order fulfillment then your core business responsibilities might start to suffer. If you delegate fulfillment to a 3PL then you free up capital you can reinvest in your business. Not to mention, you gain more time and energy to focus on your business.
Serve More Locations: Your consumers’ locations and number of distribution centers all matter because of the time to delivery and the cost. 3PLs often have multiple strategically located fulfillment centers giving them greater reach, driving down the cost of your shipping.
When Should Sellers Engage a 3PL?
Most ecommerce brands should be using 3PL. Regardless of ecommerce platform, product category, or industry, can benefit from outsourcing fulfillment.
Let’s examine the signs that your business is ready to partner with a 3PL:
Shipping Has Increased to 100+ Orders Per Month: There is no magic number that indicates when exactly your volume has reached a point where it's better to outsource. However, typically if you are shipping 100+ orders per month, then you have had to enlist the help of friends, family, or additional labor to pack boxes quickly to meet the demand.
Order fulfillment quickly becomes a problem because you are swamped, and it is a costly activity that generates little revenue to offset costs, so it could be holding back our company’s growth. Not to mention, if you have hired warehouse workers to fulfill then you might actually be bleeding money in an effort to pack items, print labels, transport the items to a post office, and more.
It costs you time and labor which you could be using to acquire more customers, launch marketing campaigns or develop new products. At this point, it is high time you partner with a 3PL.
Running Out of Space: As your order volume increases, your inventory grows. If you are fulfilling orders yourself, then you have to keep products on hand and find adequate storage space. A 3PL warehouse will hold your products in their outsourcing inventory warehouse and then fulfill all orders effortlessly, so you don’t have to worry about storage or fulfillment. You’ll never have to fear running out of space.
Offering Two-Day Shipping: Amazon is the king of two-day shipping. However, if you are self-fulfilling orders, then providing your customers with two-day shipping takes a huge toll on your profitability. This is especially true if you are providing two-day expedited air shipping. Working with a qualified 3PL with better negotiated rates makes two-day shipping feasible and affordable.
How to Choose the Best 3PL Company
At this point, you have decided that finding a 3PL company is in your company’s best interest and will help significantly with your bottom line. Your company will save time, money, free up resources, and experience growth. However, choosing a 3PL warehouse is not always easy. There are numerous companies out there so you might wonder which is the best 3PL company to meet your needs.
You’ll want to find a 3PL that you can trust to handle your inventory and maintain customer satisfaction. Here are a few questions to ask any 3PL before making the decision on which is best for your company:
How is your 3PL different from your competitors?
This is a basic question, but you’ll want to pay close attention to the answers. Honestly, not all 3PLs are created equal.
What technology and 3PL software do you rely on?
You want to pick an innovative tech-enabled 3PL that provides streamlined, integrated shipping and fulfillment solutions. They should also be running WMS software to help with automation including order and inventory management so they can track orders and manage returns effortlessly.
Where are your fulfillment centers located?
You not only want to know where the headquarters of the 3PL is, but also their other fulfillment centers. The locations will give you an idea of who can offer the fastest delivery coupled with affordability. Warehouse locations help your shipping strategy and ensure the ease of two-day shipping.
Understanding 3PL Pricing
There are a variety of 3PL pricing models that depend on your business’s needs. However, here are the most common 3PL costs:
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Cost |
Definition |
| Onboarding | Fulfillment services, tech setup |
| Inventory Receiving | Incoming inventory acceptance and storage such as per unit, flat rates, per hour, or per pallet |
| Inventory Storage | Storage space - warehousing, per SKU, fixed fee, fixed fee per shelf, fixed fee per pallet/pallet used, bin fee |
| Pick and Pack | Pay for each item/action included in every order |
| Packaging | Packing materials, boxes, air-fill for items |
| Kitting | Kitting and assembly |
| Shipping | Shipping from the fulfillment center |
How to Manage a 3PL as a Seller
An effective warehouse management system (WMS) is a software solution to track inventory and manage the entire warehouse operational process. The software focuses on managing, shipping, and tracking all of the warehoused inventory. Warehouse management software helps everything run smoothly, distinguishes activities, and manages all processes.
WMS software provides the following:
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Real-time visibility to track all inventory statuses and levels.
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Live integrations (coupled with reports) with shopping carts to avoid the possibility of backorders and stock shortages.
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Recording and tracking inventory supplies, locations, lots, serial numbers, and expiration dates.
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WMS identifies and then recognizes the all SKUs.
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Provides visibility to the entire warehousing process.
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Offers control of the inventory sent along the logistics pipeline.
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Tracks all aspects of receiving packing, packing, and shipping.
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Assignment and complete tracking of items from products to the various storage locations using automation.
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Control of supply chain logistics to ensure timely delivery of products.
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WMS scales to guide flexible periods during the peak and low seasons.
